From gelding to stallion

Prof. Grzegorz W. Kołodko was the gala guest speaker at Poland Today’s first 'Poland & CEE: Co-building the Belt & Road' conference in Warsaw.
Economists usually refrain from using words like ‘miracles’, yet it is hard to deny that something special happened in Poland when it transformed from a failed communist experiment in 1989 to a tiger economy in less than 30 years. But can the success hold?

In 1989 Poland emerged from over 40 years of communism as an economic basket case. Fast forward to 2019 and the country has recorded 27 years of continuous economic growth and was last year promoted by FTSE Russell to Developed Market status, joining an exclusive group of 25 major economies. Poland’s success was no foregone conclusion: it was achieved through sound policy and the hard work and ingenuity of the Polish people. One of the architects of this transition was Prof. Grzegorz W. Kołodko, Poland’s former Deputy Prime Minister and Minister of Finance (1994-97 and 2002-03). To celebrate this modern economic phenomenon, he delivered a keynote speech at Poland Today’s first ‘Poland & CEE: Co-building the Belt & Road’ conference in Warsaw. Here is an edited version of his speech.

Prof. Grzegorz W. Kołodko is the world’s most quoted Polish economist. He is an intellectual and politician, and a key architect of Polish economic reforms. He was the Deputy Prime Minister and Minister of Finance from 1994 to 1997 and from 2002 to 2003. He is a Member of the European Academy of Arts, Sciences and Humanities, and Founder and Director of Transformation, Integration and Globalization Economic Research (TIGER) at Kozminski University.

Poland’s metamorphosis

During the uncertain transition years in the early 1990s, a popular joke circulated around Warsaw: you can make a gelding out of a stallion but not the other way around. That was ultimately the assumption that my colleagues in government, peers in academia and I were ultimately charged to test, if not disprove. Could we turn this rusted, wrecked rig into an economic powerhouse of the future? Three decades later, the answer has arrived firmly in the affirmative. Yes. We have converted the underperforming miserable economy of state socialism into the competitive, open and prosperous market economy that is admired by the world today.

In many respects, we have caught up with the world economy and continue at full throttle. Granted, we are not that important from a global perspective. Poland’s GDP is just around 0.9% of the world economy’s total output and our population makes up approximately 0.5% of the world’s population. Our fertility rate is one-third of the replacement rate. Yet in a geopolitical and geoeconomic context, we have increased our standing by at least half a percentage point by my reckoning. One might ask next: how did Poland achieve this metamorphosis?

My mantra is that things happen the way they do because many things happen at the same time. Indeed, many things happened at the same time during Poland’s transformation.

Shock without therapy

Another catchphrase that was popular at the time was ‘shock therapy’. Instead of easing into a market economy, the theory called for an acute and sudden liberalisation of trade and labour controls, along with the mass privatisation of public assets.

As a reader of my body of work would attest, I prefer a slightly different interpretation when assessing its application in Poland’s transition. Namely, I use the phrase ‘shock without therapy’, for I argue that there were too many unnecessary shocks and not enough therapy. In fact, one could make the case that the transitional contraction at the onset of the ‘90s was larger than necessary. While the nature of the journey remains a point of contention, there is little argument about the destination.

Poland is one of two countries in the world (the other being Australia) that have enjoyed 27-28 consecutive years of economic growth. We were not even for a single quarter in recession because of proper institutions and sound policies. It was a rapid change. By the time I left government for the first time in the spring of 1997, GDP expansion was 7%. Poland’s GDP per capita (PPP) has already exceeded $30,000 or approximately 50% of the American standard.

If we compare Poland’s economic performance to Ukraine’s or that of other transition economies – or even Germany and the West, for that matter – it is a real success story, if not a miracle. But if one broadens the scope of analysis beyond the GDP data, a new dimension to the ‘miracle’ presents itself, a dimension which my theory of new pragmatism explores. This theory advocates for analysis and policy based not necessarily on the so-called GDP reality but on the strategy and mechanics of development.

Here, the political changes are just as important as the economic transformation, especially when the goal is for long-term and sustainable economic growth. I must admit, I was much more concerned with the latter than the former back in the early 1990s. Conversely, the goal of political transformation was on the top of the agenda at the round table talks – the discussions held in 1989 between the government, the trade union ‘solidarność and other opposition groups.

Indeed, most thought it would be much easier to accomplish political democratisation than economic monetisation. However, somehow it transpired that we achieved just as much in the economic field as in the political realm. In other words, through 30 years of tremendous work by the people of Poland – entrepreneurs, policymakers, intellectuals, almost everybody – we have built much more than just a market economy but a political democracy.

Now, democracy is not a requisite for economic expansion. One only needs to look at China to realise this. And yet we do value democracy in the west as much as the power of the free market. We place our trust in private entrepreneurship but not without social inclusion, in the ‘invisible hand’ – but alongside proper government regulation. In light of this, it seems prudent to extend the analysis beyond the purely economic indexes.

For example, if one looks at the Legatum Prosperity Index, the OECD Better Life Index, or the Inequality-Adjusted Human Development Index, Poland is ranked higher in the world in all these indexes than in the GDP per capita ranking. In short, we enjoy a higher quality of human capital and infrastructure than countries with a similar output.

International integration

This year on July 11, it will be 23 years since I helped to bring Poland to the OECD. It is interesting that the NATO signing ceremony has been well publicised but little attention has gone to the day we joined the OECD. Of course, I consider Poland’s integration with the world’s leading economies as a bigger achievement.

Similarly, European integration was a must for us in 2004. It is true that we both gained and lost freedom at the same time. One might say Kazakhstan or Turkmenistan is free. unlike us, they can do whatever they want with their exchange rate or competition policy. We have to fit in the institutionalisation of the European Union. We had to give a bit of national sovereignty for the common interests of the European Union, which I think is a good answer for globalisation.

Can the success hold?

As a student, I travelled to the United States for the first time in 1977. Interestingly, the America I first discovered around two generations ago commanded a GDP per capita lower than which Poland enjoys today. This  picture should only improve over the next 20-25 years. The momentum of history is on Poland’s side. The current fundamentals also bode well for the medium to longterm, despite the bears of the market proclaiming a slowdown of growth.

Of course, growth rates will naturally plateau – it is unrealistic to expect that the economy will grow perpetually above 5%. The growth forecast for 2019 places Poland in 3rd position in the EU with a projected rate of 4.4%. In subsequent years it will be a little bit less. In the long run, of course, we are not going to repeat another 28 years without economic recession. But we can sustain ourselves with a long-term target of 3-4%. Our current account is not a problem with a deficit of 0.4% of GDP. At just below 2%, inflation is more than manageable.

When I entered government for the first time, inflation surfaced around 37% and it was considered a great victory when it dropped to 13% by the time I left in 1997. The government has initiated a liberal regime of social transfers, which is helping to reduce income inequality and poverty. Most of Poland’s poverty can be found in large family households and in this case, the so-called 500 Plus family support programme is helping these families to exit poverty. And for the time being, the budget is under control.

Public debt is around 47% of GDP and is falling relative to GDP. At the onset of the third decade of the 21st century, at a time of trade tension, the rise of economic nationalism presents a challenge to the world and Poland alike. It has largely come as a response to globalisation, or more specifically, out of the failure of neoliberal capitalism. I define globalisation as a historical and spontaneous process of international market liberalisation and the integration of national economies into one interconnected worldwide market.

According to this definition, I believe globalisation is irreversable despite Brexit, Vive la France, America First, Alternative for Germany and Polska dla Polaków (Poland for Poles). It should also be remembered that globalisation began to gain traction around the same time as Poland entered its post-communist transition. Poland, like its fellow transition economies, rose with globalisation. Precedent is important here. Having survived the tumult of the 1990s, there is no reason why Poland cannot buffer through the current headwinds.

The euro debate

As established earlier, European integration has been kind to Poland. But whether Poland should go one step further and join the eurozone is another question. My position on this matter diverges from that of the Prime Minister, the Finance Minister, the Governor of the Central Bank, the President and the leader of the ruling party, Law and Justice. I am very much pro euro.

I think it would be a good move for Poland to join the euro common currency and thereby usher in a convergence with the proper exchange rate. What is the proper exchange rate? To put it in a nutshell, it is the rate which will secure the competitiveness of Polish export sectors. A country like Poland must manage export growth so that it increases at a faster rate than domestic output. This is the main driving force behind expansion.

Furthermore, considering that the turnover of approximately 70% of Poland’s exports and imports is settled in euro, the adoption of the euro would eliminate the currency risk in the area. The other aforementioned camp, however, claims that Poland must wait until its prosperity index reaches that of Germany. Given the current politics, it’s unlikely that we will have the euro before 2025.

I think it’s rather a matter for the second half of the next decade when the Polish złoty is expected to further stabilise, although it could be argued that it is already more stable than the euro and the dollar.

A look to 2039

A long fight lies ahead. We find ourselves in a never-ending struggle for more rationality in debate around economic performance. From this perspective, I put a lot of trust in business people and entrepreneurs, sometimes even more than in the political class. But when we return in 2039 to celebrate 50 years of Poland’s great transition, I believe we will do so in an even more successful Poland, one with  even more  importance on the world stage. For this is the process of learning by doing. We have learned a lot, including from our mistakes. Hopefully, we will continue to learn and thrive in the future.

December 19, 2019
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